Know Your Finances

Posted by Ellen Le on September 3, 2009

No doubt, you’ve been cutting back on your
spending lately. Everyone has. People are scared and recognize not only that “things”
don’t make us happy, but that more money in our retirement pot will give us
comfort in later years. We know that this current economic downturn may not be
the last one in our lifetime, and recessions lurk around corners with the
potential to set our investment accounts back at any time.

I frequently remind my clients that investing
small amounts of money pays off. The power of compounding interest thrives on
time. Now that you are in the mindset of getting by on less, invest the
difference and let it work for you.

For example, if you are ready to give up a couple
of dinners out each month, don’t fritter that money away on something else or
let it sit in a no growth money market fund. Instead invest that “found” $100
per month in a blended portfolio of stocks and bonds.

If you leave it untouched for just ten years,
it could grow, based on a conservative expected average annual return of 7
percent to $17,300! In twenty years, investing $100 per month could grow to
$52,200! Now imagine if you gave up the daily latte, the most expensive cable
channel package, the 50^th pair of shoes, the latest hardback
best-seller (wait for it to come to your local library), the latest GPS
service, cokes and popcorn at the movie theater…alright, you get the
point.

If you could sock away $500 per month in an
investment account for the next ten years you could have $86,500. In all of
these examples I assume there are no taxes to be paid on the principal growth
or on dividends and interest. I also assume that transaction costs are built
into the expected return.

No taxes on portfolio growth or income? How
is that possible? Why, it’s the Roth IRA account of course. What’s the catch? The catch is that you
need to qualify for it by having earned income from a job. To qualify for the maximum contribution
allowed in 2009 a couple needs to earn less than $166,000 and an individual
less than $105,000. You are eligible for contributing a lesser amount if you
earn between $166,000 and $176,000 (married) or between $105,000 and $120,000
(single.) The most you can contribute in 2009 is $5,000 if you are 49 years old
or younger and $6,000 if you are 50 years old or older. And you can’t
contribute more than you earn.

Unlike the traditional IRA, you never have to
withdrawal from the account. It can grow and grow and grow for your heirs. And, unlike the traditional IRA, if you
do decide to take withdrawals you do not have to pay any taxes on that
money. You can take out your
contributions at any time without taxes or penalty. After five years from your initial contribution and reaching
59.5 years old, you can also take out the earnings on the account both tax and
penalty free. You can take tax and
penalty free distributions prior to reaching 59.5 for a first home purchase,
unreimbursed medical expenses, higher education expenses, or if you become
disabled.

The rules may seem complicated but you have
until April of 2010 to get comfortable with the rules and open an account and
make a contribution for 2009. If you qualify, I urge you, if you haven’t
already, to treat yourself to the Roth IRA in 2009.

Tell your kids to open a Roth IRA now. A
25-year-old who squirrels away $5,000 every year in a Roth IRA could see a
portfolio worth $1.1 million dollars when they retire at age 65. Like I said,
the power of compounding interest thrives on time. Throw in tax-free on top of
that and the compounding is truly a beautiful thing.

About Ellen Le

Ellen is the Founder and President of Ascend Investment Management. She was born in Philadelphia and has lived in the Delaware Valley for most of her life. When she is not researching investments and managing portfolios, she pursues her interests in tennis, bridge, hiking and art. Beginning her investment career in 1981 as a stockbroker at E.F. Hutton and Co., Ellen now has over 20 years of investment management experience. Prior to founding Ascend in 2006, she managed high net worth assets for many years at Bank of America, Mellon Bank, and most recently at Davidson Capital Management. At Davidson Capital Management, Ellen served as a Senior Vice President and Senior Portfolio Manager of the firm. She managed assets for more than 50 family relationships and was a core member of the firm’s Investment Committee.Ellen earned a BA in History from Brown University and a MBA in Finance & Investments from The George Washington University. She is a member in good standing of the Chartered Financial Analyst (CFA) Institute, which is a global organization dedicated to setting a high ethical standard for the investment profession. Her professional memberships include the Delaware County Estate Planning Council, Women Enhancing Business (WEB), and the Chadds Ford Business Association. She is a docent with the Delaware Art Museum and an active volunteer with the Brown University Alumni Association.